Are we really talking about hikes with inflation up 0.1% year-over-year?
All the talk is about a September rate hike today but if an economist woke up in the United States from a 10-year coma he would be just as likely to argue for a rate cut as a hike.
There have been some decent jobs and other economic numbers but consider this:
- 37 global central banks have cut rates this year and global growth has disappointed
- The Dollar Index is up 22% y/y, which means the US is importing deflation
- Core durable goods orders are in contraction y/y, which shows companies just aren't investing (a sign they're not confident)
- Inflation is virtually flat and wage growth is years behind GDP
What the economist emerging from a coma wouldn't know is that rates are already at zero and they've been there for years.
That's the key to understanding the Fed. They're not looking through a clear prism. It's muddied by 7 years of panic economics and the lingering desire to get back to 'normal'.
That's left the Fed wanting to see a better economy, wanting to hike but they just can't justify it because of the inflation picture.
Zero inflation alone isn't fatal for the hawks but there needs to be some sign of a pickup. Core CPI is at 1.8%, which is about the midpoint of the past two years.
The St Louis Fed has a new heatmap of inflation by sector. Aside from rent and healthcare, it's code blue for prices.
